The government's first social bond has collapsed, with negotiations breaking down and the provider walking away.

The largely untested social bond model uses private investors' money to pay a provider for a social service. If the service is successful, the government pays out.

Bill English says the government has learnt lessons from the break-down of its first social bonds negotiations. Photo: RNZ / Alexander Robertson

Work started in 2013 on the bonds, which the government promoted as a way to bring innovation to social services without risking public money.

Last year nearly $29 million was put aside for the rollout of four bonds.

The first was to be a programme to help people with mental health problems get into the workforce, and the plan was to put employment consultants in GP practices.

But the provider, Wise Group, confirmed yesterday that it had withdrawn from the scheme.

It would not make any further comment saying it had been directed to refer inquiries to the Ministry of Health.

Wise Group is a member of Platform Trust, a national network of community organisations that help people with their addiction and mental health problems.

Platform Trust chief executive Marion Blake said the outcome was disappointing for people living with mental health issues who wanted employment.

"I think it's absolutely indicative of the cost to the community sector of doing business with government. We're seeing this over and over again.

"The government is inviting innovation, inviting propositions that will change the way that we do things, but yet we go through what appears to us, from the community sector, as tedious bureaucratic slow processes that kill things before they're even born."

The mental health employment bond was expected to have been under way by now.

According to official documents, $1.62m has been spent getting the bonds to this stage.

The documents show in the 12 months to the end of April 2016, $799,000 was spent on the social bonds pilot. The development of the first social bond accounts formed approximately $550,000 of this.

In the 2013/2014 and 2014/2015 financial years to 1 May 2015, approximately $819,000 was spent on the bonds programme, including consultants.

The government said when it announced the funding last year that it would not face any liability for the scheme and would only pay if the programme delivered a result.

In April, RNZ reported the programme was at a standstill because investors were apparently reluctant due to uncertainty over whether the government would guarantee the security of the private funding.

RNZ understands the government has now offered money to investors to get them over the line and put money in the bonds.

Labour's Annette King says the government needs to cut out the middle man. Photo: RNZ / Alexander Robertson

Finance Minister Bill English has not denied this, but said money was set aside while negotiations about the first programme have been ongoing.

"In the first one there was a lot of discussion about what it would take to get the parties across the line."

When pushed further on whether the government would provide money as an incentive for investors, Mr English said they were matters around negotiation.

"I understand [with] the first one negotiations have stopped and it looks like the parties have pulled back, so clearly it wasn't a successful conclusion to that, and we've learnt a lot and we'll now get on with the next one."

Labour's health spokesperson Annette King said the whole programme had been a waste of money and was doomed to fail.

"It was never going to fly because there was no need for them to put in another funder. All the government needs to do is to fund a group like the Wise Group direct and cut out the middle man."

The whole thing was nonsensical as social bonds had failed in other countries, she said.

Ms King could not understand why the government had pursued it.

But the government plans to continue with its social bond programme.

Mr English said the government had learned how to make the next bond work.

His office was undertaking a review of the process on the first bond and the minister was expecting the findings next month.

Social service funds too precious to waste - Northland MP

Meanwhile, Northland MP Winston Peters said the money spent on what he called the government's failed social bonds scheme could have kept Lifeline afloat.